The pain-free way to prepare a financial management policy for your NPO

Making sure your non-profit organisation (NPO) has a glowing financial management policy is a must.

Stuffy though it may sound, this document lays out a set of expectations and processes in writing, minimising risk and leaving no room for any flawed assumptions from staff or board members.

But how do you go about writing an airtight financial management policy without the stress?

In this article is some expert guidance to help you create and implement a strong financial policy, no matter the size of your NPO.

Here’s what we cover:

• What is a financial management policy?
• What to include in your financial management policy
• Financial management policies: What next?

What is a financial management policy?

Let’s strip back the jargon.

A financial management policy is just a list of rules about your organisation’s finances that you’ve set out and agreed on.

This should cover all areas of the NPO, from accounting to HR and customer service.

Why is it important?

Well, it does the job of describing and documenting exactly how the board wants any related activities to be carried out.

That could include:

• Anything related to fund management
• The maintenance of controls
• Providing training and monitoring resource
• Using the document as a point of reference both internally and externally (e.g. employees, trustees, auditors).

What to include in your financial management policy

That’s all well and good, but what information should you actually pack into this all-important document?

A robust financial management policy needs to cover your organisation’s accounting systems, processes, and best practices.

What that means is detailing the procedure around the input, processing, output, control, and distribution of your NPO’s financial data and reports.

Here’s a quick checklist to make sure you’ve covered the essentials:

• Make sure the NPO’s accounts follow sound accounting principles and practices.
• Send accurate monthly reports to the treasurer, board of trustees, and management team to promote better financial management.
• Ensure the organisation’s resources (financial or otherwise) are used correctly, transparently, and with accountability.

Remember, there’s no one-size-fits-all approach to this document.

Your NPO might need a more comprehensive policy, with more granular details about specific responsibilities, but this general outline is a great place to start.

The most important thing here is that your policy is tailored to your organisation’s needs. To do that, the document needs to address key areas and outline the associated rules and procedures.

Financial rules will form the backbone of your organisation’s agreements about how it will look after its money.

As well as helping your organisation to function better, they show funders and other bodies that your group is looking after its money well.

To agree financial rules, your committee will need to decide organisationally relevant detail, such as (but not exclusively):

Financial records

• What sort of financial records will you keep so you can meet your legal/statutory obligations (such as the Charities Act, HMRC)?
• Do trustees have proper financial control of the NPO?
• Does the organisation meet its obligations to funders? How?
• If cash payments are made, will you use a petty cash book?
• Before the start of the financial year, will trustees approve a budgeted income and expenditure account for the next year? How will it be agreed on and set?
• At year end, how will you review, assess, and revise the budget?
• Will reports comparing actual income and expenditure against the budget be presented to trustees? When and how?
• Will an auditor or independent examiner be hired to audit the accounts?

Banking

• Which bank or building society accounts will the organisation hold?
• Who will the signatories be?
• Will the bank mandate (a list of people who can sign cheques or authorise payments on behalf of the NPO) need to be approved and recorded by trustees again if any changes are made?
• Will you need the bank to provide statements each month, and will those be reconciled?
• Will your organisation be able to work with any other bank or financial institution, or use overdraft facilities or loans without the input of trustees?
• How many people will need to sign each cheque?
• How many people will need to authorise BACS payments? 

Petty cash and cash handling

• Do you expect to deal with petty cash?
• If so, how will you handle it and how much will you keep for the float?
• What is the maximum amount that can be paid out in cash?

Income

• How will you receive money (cash, online payments, etc)?
• How will you record payments?
• Will any payments received be recorded straight away, or will there be a slight delay? Will you keep files of documentation to back this up?
• How will donations be collected?
• What kind of donations will you accept?
• How will the NPO manage donations?
• What about Gift Aid and Gift Aid reporting?
• What kind of fundraising activities will you take on?
• How will you manage funds, and how will you maintain transparency?

Expenditure

• How will you make sure all expenditure is properly authorised?
• Who is responsible for the NPO’s chequebooks?
• How will you regulate online banking and credit card payments, and what checks and balances will you put in place?
• When it comes to cheques, will the relevant payee’s name be inserted on the cheque before it’s signed, and should the cheque stub always be completed in full?
• Can any smaller payments be made without calling a meeting for approval? If so, what is the maximum value allowed?

Payment documentation

• Will any payments from your NPO’s accounts be backed up with an invoice?
• How will the original invoice be kept and filed?
• How should the cheque signatory reference the payment (E.g. cheque number, date cheque drawn and amount of cheque)?
• How will salaries be recorded? Is it clear and transparent?
• How will the NPO record and agree on any expenses or allowances?

Reporting

• How will you define the financial year?
• How frequently will the treasurer need to report to the board?
• How will you generate reports?
• Do you need a finance sub-committee?

With this list of considerations in your back pocket, you’ll be well-equipped to prepare a solid financial management policy.

Talk to your treasurer, the finance committee, and the executive board not just as you get started, but check in along the way.

Oh, and don’t forget to carry out an informal risk assessment before getting started on your draft.

Financial management policies: What next?

Once you’ve got a working document drafted up, it’s time to get it reviewed and discussed before you present it to the board for approval.

When that’s all signed off, it’s time to think about adoption, usually in the form of training for all existing and incoming employees.

This is a living document, so review your financial management policy annually to make sure it continues to work for your organisation.